Consumer Portfolio Services (CPSS) Q3 2025 earnings call transcript

Thank you. Good morning, everyone. Welcome to our third quarter conference call. I think for the most part, it's three quarters in the books. The year is preceding kind of pretty much exactly what we would expect, with a small exception that we haven't really grown as much as we wanted. We had pretty high hopes for growth this year.

We've had some growth, but very what we'll call modest growth as opposed to more aggressive growth, which is probably okay. Generally speaking, if you look back at the last few calls, we've sort of been in not really a holding pattern, but in a wait-and-see pattern in two ways. We wanted to see, you know, get sort of the 22 and 23 portion of the portfolio to shrink and see if we can get that reformed as best we could, even though it wasn't a particularly great paper. And then on the flip side, we wanted the 24 and 25 vintages to really prove out that we, in fact, have much better credit. And I think, as I mentioned in previous calls, Little by little, the 24 and 25 have all proven to be better.

From 23C on, from D to all the 24 deals and the 25 deals, each one has improved performance-wise better than the previous one. Now, it's still early, certainly for the 25 deals, but it's a trend we wanted. It's a trend we've been kind of waiting to see before we tried to get overly aggressive. And again, on the other side, we want to keep the 23 and the 22 paper running off because that paper isn't performing great. You know, compared to others, it did fine. But compared to what we want, it hasn't done as well as we had hoped. And it's now become a much smaller part of the portfolio. It's down below 30%. And certainly, as time goes by, that number goes down.

The percentage of the good paper goes up. And the mix will change and probably create a very good forward-looking program as we go. In terms of the quarter, you know, we did add a new credit line just after the quarter. So that was a big plus. So we now have tons of funding. Also, we did a securization in what could be termed somewhat more difficult market due to the tricolor problems. Good news on that front is we've never – we've always had a third-party custodian. We've never had control of our collateral. We have none of the issues that caused their problems. As much as, you know, we can tell everybody that, it still put a little bit of a cloud in the industry while we're trying to get a securization done.

and it's important that even so we were pretty easily able to get the securitization done, slightly more expensive than we had hoped, but nonetheless as I've said numerous times getting securitization done, getting them done is the most important thing we have to do. You have to be able to securitize the paper otherwise we have serious problems but overall quarters worked fine I'll get back to some more specifics on that after we go through the rest of the material. I'm going to turn it over to Danny to go through the financials.

Thank you Brad Going over the financials, revenues for the quarter, $108.4 million, is up 8% from the third quarter of last year, which was $100.6. For the nine months ending September 2025, revenues were $325.1, which is a 13% increase over the $288 million in the nine months ending September 2024. Two things of note driving revenue. Our fair value portfolio is now up to $3.6 billion. That is yielding 11.4% net of losses. And the other thing of note for top line revenue is that we did not have a fair value mark this quarter. We did have a $5.5 million mark in the third quarter of last year.

Moving to expenses, $101.4 million in the third quarter this year is also up 8% over the $93.7 million in the third quarter of 2024.

For the nine months ending September 25 million of expenses is up 14 from the million last year Interest expense is the main driver of the increase in expenses and it largely due to our increasing securitization debt as the volume has picked up over the last year. Pre-tax earnings is $7 million compared to $6.9 million last year. For the nine months, $21 million of pre-tax earnings is up 4% from $20.1 million in 2024. Likewise, net income of $4.9 million is also 2% higher than the third quarter of last year.

The nine months ending September 25, net income was $14.3 million, is at 1% from $14.1 million last year. And finally, diluted earnings per share, $0.20 per share, is flat from last year. For the nine months, $0.59 compared to $0.58 last year.

Moving to the balance sheet, cash and restricted cash is $151.9 million for the third quarter of this year. Finance receivables, which is mostly now our fair value portfolio, that is up 16%. So the fair value portfolio is $3.62 billion as of this quarter compared to $3.13 billion last year. So that is up 16%. 16%, largely due to origination volumes, as Brad alluded to earlier, origination volumes of $391.1 million for the third quarter and $1.275 billion for the nine months ending September 25 is driving that increase in our fair value portfolio.

Moving down the balance sheet, our total debt, which is the sum of our warehouse line credit debt, residual interest financing, securitization debt, and long-term debt is $3.4 billion this quarter compared to $3.1 billion last year. That is an 11% increase. So what's happening is we've got a 16% increase on the asset side in our fair value portfolio and only 11% increase in the debt. So that's showing that we're able to manage with less leverage and is improving our balance sheet. That can be seen in our shareholders' equity number.

$307.6 million this quarter is up 8% from the $285.1 million last year. Looking at other metrics, the net interest margin of $49.3 million this quarter compared to $50.5 million last year. For the nine months, $152.3 of net interest margin this year compared to $149.5 last year. Our core operating expenses of 43 million is down 4% from the 44.6 million in the third quarter of last year. And for the nine months it's flat 134 million this year and last year. However, measured as a percentage of the managed portfolio, the core operating expenses down 4.6% this quarter compared to 5.4% in the third quarter of last year. So we're starting to see some improving efficiencies as we're able to manage the cost side of the business to allow the portfolio to grow without really seeing increases in cost.

And lastly, the return on managed assets is flat, 0.8% this quarter compared to 0.8% in the third quarter of last year. I will turn the call over to Mike.

Thanks, Danny. In terms of operations, again, in the third quarter of 2025, we originated $391 million of new contracts for the first nine months of the year. We purchased $1.275 billion of new contracts compared to $1.224 billion during the first nine months of 2024, which is a 4% increase year over year. Our year-to-date originations are in line with our 2024 originations, and while not the rocket growth that we had hoped, things go right, 2025 will end up being our second-best year in our 34-year history. Growth remains somewhat difficult as our focus has been on providing an affordable product for subprime consumers who are facing macroeconomic headwinds like high interest rates and things like that. With this in mind, we have continued to tighten our credit box in 2025.

That, combined with dealers reporting lower foot traffic and increased competition for lost business, that's made our growth prospects kind of tough in the first nine months of the year. But again, like I just said, 2025 should be the second best year in our history. So keeping things in perspective, it's going to be a really good year. One thing to note, we continue to originate loans at the upper level of the subprime spectrum, with 90% of our originations coming from franchise dealers and only 10% coming from the riskier independent dealers.

Our tight credit box has allowed us to originate better paper within our upper tier programs, and this is important while still holding a 20 APR That bodes well for our NIM which Danny just covered and almost equally important our credit performance which Brad mentioned We have had to pivot to our organic growth, given our tight credit. To do that, we are adding new dealers to our dealer list to increase applications, and we have improved our capture rate this year from the high force to now over 6%. So with more applications and higher capture rate, that's led to more organic originations.

We have also put a specific focus on large dealer groups, which we define as having a dealer that has 10 or more dealerships under their umbrella. We started this initiative with a special internal unit focusing on large dealer groups about two or three years ago. and at the time, large dealer group originations only comprised 17% of our overall originations.

And as of the end of the third quarter of this year, it now comprises 31% of our originations. So we've done a good job building our large dealer groups.

We also continue to rely on our personal relationships with dealers to feed our originations. The retail auto industry is still surprisingly based on personal relationships, even though the technology has grown. And we currently have 100 reps that are personally visiting and calling on our dealer clients daily. One thing that we have been able to do at the end of the third quarter is we've cut our funding time down to one day. We've cut it about one day year over year. Dealers appreciate our personal service and certainly our fast funding.

It seems like the little things matter when competing for business when we have such a tight credit box. On an operational front as well, as Danny noted, we've been able to lower our OPEC substantially year over year. About 18 months ago, it was sitting at 6% of the managed portfolio, and as of the end of the third quarter, we're down to 4.5%. One of the areas of improvement for us has been to lower our employee costs, which besides interest expense accounts for a large portion of our expenses.

We've actually been able to shrink our headcount 3% from the beginning of this year to the end of the third quarter, all the while growing our portfolio to an all-time high and really heading towards our second best year in our history. The percentage of employees of the portfolio balance has dropped from 28% to 24% year over year.

Turning to credit performance, the total DQ greater than 30 days for the third quarter, which also includes repo inventory, was 13.96% of the total portfolio as compared to 14.04% as of the third quarter of 2024. That's a slight improvement year over year and follows a trend that we have seen sequentially month over month. The total annualized net charge-offs for the third quarter were 8.01% of the average portfolio, as compared to 7.32% for the third quarter of 2024.

Looking at the vintage performance, we continue to see significant credit performance, as Brad alluded to, with 2023C and continuing vintage over vintage through 2024. We believe that the 24 vintages and our early look at the 25s is a result of our ongoing credit tightening, which we started at the end of 2022 and ratcheted it up quite a bit in 23 and 24.

Of note is that the troubled 22 and 23 vintages now are below 30% of our portfolio and running off quite quickly. So that and the performance of the 24s in our initial look at the 25s is showing us a light at the end of the credit performance tunnel. The other thing we do internally to analyze credit performance is we study the default curves, which, depending on who you ask, may be a more accurate metric to judge performance as those curves don't account for recoveries and other loss mitigation tools. and those curves reveal that there is a significant difference between the early 23s and the better-performing 24s and 25s.

Comparing us to our competitors' credit performance, the in-text data shows that we remain among the very best credit performers in the subprime space when looking at apples-to-apples comparisons. Finally, turning to recoveries, they do remain relatively light settling in the low 30s. We have seen a little bit of an uptick in the third quarter, but we typically want to be in the low to mid-40s. Our analysis suggests that improvement is definitely on the way. Our data revealed that the recoveries from the 22 and 23 vintages are dragging down the overall recoveries. In the third quarter, vehicles from the 22 vintages were getting 19% recovery, and vehicles from the 23 vintages were at a 23% recovery. However on a positive note recoveries from the 24 vintage were at a more palatable 36 and recoveries from the 25 vintage so far were at the historical average of 42 So once the 22 and 23s flush out of the system we see the recoveries increasing back to historical norms One more last bit.

One of the key economic factors that we think about with the business is the unemployment rate. Right now it stands at 4.3% as of the end of August of 25. Various governmental agencies expect the unemployment rate to rise to only about 4.5% in 2026. This compares the long-run national average unemployment rate of 5.5% and a rate over 6% being considered elevated in intercession risk. So we're still in a good spot with unemployment risk. And with that, I'll send it back to Brad.

Thanks, Mike. In terms of looking at the industry, the big news in the industry is basically the trichloric collapse. As I mentioned earlier, that was really, you know, God knows what they were doing, but they shouldn't have been doing it. And it really comes down to they did not, they were custodian for their own contracts and double-pledged them, all sorts of stupid stuff. We don't have, you know, we were never in that position. We and many of the companies like us in our industry have custodians who take care of all the contracts, but not having a custodian in place was a mistake for Tricolor, and, you know, that should have been taken care of. But anyway, we don't have those issues.

It did have an effect on the industry. It scared a bunch of people, particularly a bunch of investors, and certainly those involved with Tricolor. Good news is, even with those kind of problems, we were able to get our securization done. The market remained stable. I think, you know, this will pass. I think it's good that people will check on a bunch of stuff, make sure everyone else has custodians, and these kind of things can't happen in the future.

Beyond that, it is kind of slow across the industry. It's a little interesting that we're sort of a little disappointed in our growth, and yet we're probably, as everybody mentioned previously, the second strongest year we've had in our history. But, you know, we want more. We want better. We've also noticed the banks moving in a little bit. Capital One is making a little more of a presence. Santander is being a little more aggressive. And the credit unions are back a little bit. So all those things probably put a slight amount of pressure in terms of growth.

And as I've mentioned, we're really, I think everyone in the call has repeated, We're still trying to get, you know, we want the 22 and 23 paper gone. We want the 24 and 25 paper to show us how good the credit is. As Mike pointed out, if you look at the defaults, the paper is even better than it looks. All those things are very, very positive in terms of where we're going to go going forward. I think, you know, lower interest rates. I mean, there's really a bunch of things going our way. And all we need, you know, tricolor will go by the wayside soon enough.

Interest rates can come down. Twice already. we, you know, rumor is they'll keep coming down. Those go straight to the bottom line for the most part. We're going to try and maintain our APRs and put most of that into the margin, improved margin. We continue to cut expenses every possible corner. So we're doing, you know, all the things we're supposed to be doing. As Mike mentioned, unemployment. You know, I've told people that our company is, you know, we see the tip of the spear in terms of recession.

Our customers are literally right out in front. And, you know, when we hear from them, It's not so much, you know, gee, I can't pay. We kind of expect that occasionally from some customers. It's when they say, I don't have a job, I can't pay, come pick up the car, that you have a problem. We are not hearing any of that. You know, same old things. Times are tough.

You know, the economy is kind of loose right now. So some of our customers are having difficulty. But none of them are saying, hey, I'm out, come get the car. That's when you know there's problems. You know, unemployment going up is the real killer for us. It's not. We're not overly worried about it going up a little bit. So we think that's a very strong indicator. So if you take the interest rates, you take the unemployment position, you take interest rates should spur the economy a little bit. You take the fact that we're moving the non-performing or non-earnings-paying part of the portfolio off the balance sheet and putting on more and more good paper. It really kind of sets us up in a real good spot in terms of going forward.

Not only that, but in 22-23, we had to post a lot of cash in our securitization. and that cash will start rolling back out of those securitizations as they run off, you know, mostly towards beginning to mid next year. So not only should we have sort of an earnings boost from lower interest rates, hopefully get some more growth, better credit performance overall in the portfolio as the old stuff runs off, but we actually should be beginning to improve our cash position as well. So, you know, of course, it all sets up for what could be a very good year next year, and we'll see. We need the economy to hang in and start improving. We need all the things I just said to come true.

And then I think we're in a very good position to really start growing with our better credit, knowing the credits performed in 24 and 25, and again, 23, 23, 22, 23 going away. So, you know, it's as positive an outlook as we probably could have going into the fourth quarter. Fourth quarters tend to be a little bit slow, but then you bounce into the first two quarters, and those are always good.

Anyway, we appreciate everyone's attention and the call. and we'll look forward to speaking again in February. Thank you.